Understanding Indonesia’s Double Tax Avoidance Agreements

Indonesia Double Tax Avoidance Agreements (DTAAs) are crucial for businesses and individuals operating across borders. These tax treaties prevent double taxation on income earned in Indonesia and abroad, making the country an attractive destination for international investors.

Indonesia’s DTAA network simplifies the complexities of taxable income and cross-border compliance by eliminating tax conflicts and fostering transparency.

What Are Double Tax Avoidance Agreements (DTAAs)?

Double Tax Avoidance Agreements (DTAAs) are treaties between two countries designed to prevent the same income from being taxed twice. These agreements promote international trade and investment by reducing tax burdens and ensuring fairness.

Why Are DTAAs Important?

Global investors and expatriates often face double taxation—paying taxes in both their home country and the country where income is earned. For example, a company might be taxed in its home country and again in another country where it operates. DTAAs solve this problem by offering tax exemptions or reductions.

Key Benefits of DTAAs

• Prevent double taxation, ensuring businesses and individuals keep more of their income.
• Promote cross-border trade and investment by reducing tax conflicts.
• Provide clarity on tax responsibilities between countries.

How DTAAs Work

• Exemption: Income taxed in one country is exempt in the other.
• Tax Credit: Taxes paid in one country are credited against the tax due in another.

Why Indonesia Has Double Tax Avoidance Agreements

Indonesia has signed over 71 tax treaties with countries worldwide to avoid double taxation on income earned by taxpayers working or trading with Indonesia. These agreements cover income such as dividends, royalties, interest, and withholding tax, simplifying cross-border taxation.

By reducing tax burdens, DTAAs make doing business with Indonesia more attractive and encourage investments between Indonesia and its partner countries.

How DTAAs Apply

To benefit from a DTAA, taxpayers must provide proof of residence, such as a Certificate of Domicile (KITAS – SKTT) or other valid documentation. To ensure adherence to the agreement’s rules, taxpayers must also comply with anti-abuse regulations and demonstrate full ownership of income or assets.

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Countries With Which Indonesia Has DTAA Agreements

Indonesia has established Double Tax Avoidance Agreements (DTAAs) with more than 71 countries to facilitate cross-border trade and investments.

These agreements define terms and rates for withholding tax, dividends, royalties, interest, and branch profits. Below is an overview of countries with which Indonesia has active DTAAs:

Region	Countries
Asia	Algeria, Armenia, Bangladesh, Brunei, Cambodia, China, India, Iran, Japan, Jordan, Laos, Malaysia, Mongolia, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Syria, Taiwan, Tajikistan, Thailand, Uzbekistan, Vietnam
Europe	Austria, Belarus, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Russia, Serbia, Slovakia, Spain, Sweden, Switzerland, Ukraine, United Kingdom
North America	Canada, United States
South America	Brazil, Argentina, Venezuela
Oceania	Australia, New Zealand, Papua New Guinea
Middle East	Kuwait, Qatar, Saudi Arabia, United Arab Emirates
Africa	Egypt, Morocco, Seychelles, South Africa, Sudan, Tunisia, Zimbabwe

Key Provisions in Indonesia’s DTAA Agreements

Indonesia’s Double Tax Avoidance Agreements include provisions to ensure fair taxation and foster economic collaboration. These key provisions govern how income is taxed across jurisdictions and provide clarity for taxpayers.

• Residency Rules: Define the tax residency of individuals and entities to avoid conflicts in determining where taxes are owed.
• Permanent Establishment (PE): Establish guidelines on taxing income earned by foreign businesses operating in Indonesia, focusing on whether they have a significant presence in the country.
• Withholding Tax Rates: Specify rates for taxes on dividends, interest, and royalties, often reducing them for treaty partners.
• Income Exemptions and Tax Credits: Offer methods to eliminate double taxation by exempting income in one country or providing tax credits in the other.
• Anti-Abuse Provisions: Include measures to prevent treaty misuse and tax avoidance by ensuring income flows comply with legitimate economic activity.
• Exchange of Information: Promote transparency through data sharing between countries to combat tax evasion.

Tax Components Addressed

• Dividends: Lower withholding tax rates, often depending on the ownership percentage.
• Interest and Royalties: Reduced rates to support financial and intellectual property transactions.
• Capital Gains: Taxation rules for gains from property or share transactions.
• Branch Profits: Special provisions for taxing income from branches of foreign companies.

How to Claim the Benefits from Indonesia’s DTAAs

Taxpayers must follow specific procedures to exploit Indonesia’s Double Tax Avoidance Agreements fully. Here are the steps to claim DTAA benefits effectively:

Submit a Certificate of Domicile (CoD)

To access DTAA benefits, applicants must present a Certificate of Domicile (CoD) to Indonesia’s local tax office. This certificate can be in a format prescribed by Indonesia’s Directorate General of Taxes or issued by the treaty partner country. Without a CoD, the standard 20% tax rate applies.

Pass Anti-Treaty Abuse Tests

Applicants must meet anti-treaty abuse requirements for all types of income derived from Indonesia. These tests evaluate whether:

• The entity employs sufficient staff with expertise relevant to its operations.
• The entity engages in business activities beyond receiving income from dividends, royalties, or interest.
• Fixed or non-fixed assets exist to support the business.
• The entity demonstrates economic substance in its establishment or transactions.
• The entity operates with an independent management team and decision-making process.

Undergo Beneficial Ownership Test

The beneficial ownership test ensures the applicant has legitimate control over the income and assets. Authorities will verify that:

• The entity is not acting as an agent or nominee.
• At most, 50% of its income is used to meet obligations to other parties.
• The entity retains control over the income-generating assets.
• Income is not obligated to be transferred to residents of a third country.

Taxable Income Under DTAAs

• Dividends: Depending on the treaty, dividend income may be subject to a final tax rate between 7% and 20%. Without a DTAA, Indonesian residents must withhold 20% of payments to non-residents.
• Interest and Royalties: Interest and royalty income are taxed at 20% for non-residents. However, under a DTAA, these rates can drop to 0-15% for interest and 10-15% for royalties, depending on the partner country.

Streamline Your Tax Operations with InCorp

Indonesia Double Tax Avoidance Agreements (DTAAs) are essential for promoting international trade and investment. These agreements safeguard tax residents in Indonesia from double taxation, making the country a more competitive destination for global businesses.

Individuals and companies can achieve compliance and enhance financial efficiency by understanding and utilizing these tax treaties.

Let InCorp Indonesia handle your taxation needs with ease. Our professional services are designed to simplify complex tax requirements:

• Tax Consulting: Expert advice on navigating Indonesia’s tax treaties and ensuring compliance.
• Tax Reporting: Streamlined solutions for accurate and timely tax reporting.

Optimize your cross-border tax operations by filling out the form below.